A country that is
probably currently in the most problematic situation is Turkey and the
country’s currency/bankruptcy crisis appears to be an almost inevitable
situation now. According to the latest central bank report in Turkey, Turkey’s
foreign exchange reserves totaled $ 27.4 billion over the past week. When it
borrows from them dollars and so inflates the country’s foreign exchange
reserves. The amount of contracts with local banks amounts to $ 25.9 billion.
Meaning: Turkey’s real foreign exchange reserves are only $ 1.5 billion!
{If that’s not
enough, the country’s central bank uses these balances it borrows to try to
support the local lira rate. How long can this trick work? Not for long,
especially when you mention that these contracts need to be rolled out every 3
months.}
A surge in Turkey’s
short-term borrowing masked a drop in the country’s net foreign currency
reserves to just $1.5 billion last month, said the Financial Times.
New data released on
Friday raised serious concerns about Turkey’s ability to protect its economy
and tackle any large declines in the value of the lira during the coronavirus
outbreak, the FT said.
At the end of last
month, the Turkish Central Bank sharply increased its borrowing through
short-term swap operations – which it uses to exchange lira with local banks in
return for dollars – to $25.9 billion.
When Turkey’s net
foreign assets – a sum reached by subtracting foreign currency liabilities from
assets – of $27.4 billion were deducted from short term borrowing, the figure
left just $1.5 billion of net foreign currency reserves.
Brad Setser, a senior
fellow at the Washington-based Council on Foreign Relations, told the FT that
the decline in foreign currency reserves last month was “significant” and
likely to worsen.
“Turkey needed more
reserves even before the shock from the coronavirus – and it now has an even
bigger need,” he said.
Concerns over the
economic impact of the coronavirus pandemic have sent tremors through the
financial markets. The rating agency Fitch warned this week that Turkey’s high
indebtedness – with around $170 billion in short-term debt payments due this
year – made it particularly vulnerable to global market fluctuations.
The Turkish lira fell
3 percent against the U.S. dollar this month – and almost 8 percent in 2020.
Turkey’s net foreign
currency reserve level “is not sufficient to enable the central bank to make a
sustained defense of the currency,” Paul Gamble, head of emerging Europe
sovereign ratings at Fitch, told the FT.
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